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HOW TO READ
A BUSINESS PLAN, PART 2
SELLING
EXPENSES: For
"Sample Start-Up Company"
You
will note on Exhibits C and D
that Selling Expenses are expressed as both a variable
percent of sales as well as a fixed, monthly
expense. That is because a business is likely to
have both types of Selling Expenses.
Variable
Selling Expenses: For example, in
the case of the Custom Blotter Company, the business
owner has hired a salesperson, Gwen, on straight
commission, paying her 12% of the sales price on
every blotter she sells. This is a variable expense
for the business because the commission dollars paid
to Gwen each month will vary, based on her sales for
that month. The owner cannot "budget" this
figure. Instead, it is a "projection."
Fixed
Expenses: In our Exhibits,
the fixed selling expenses are shown as: Advertising
and brochures; Travel Expenses; and Public Relations;
exhibitions. The Custom Blotter Company would budget
a fixed amount each month to these expenses.
The only difference
between Exhibit C and Exhibit D is the calculation of
a 6% royalty + 2% ad fee in one, and a fixed expense
for advertising in the other. We will call this the "Franchise
Factor."
THE
FRANCHISE FACTOR:
In Exhibit C, you will note that the
"Variable Selling Expense as % of Sales"
assumes a 12% commission paid out to a sales person,
plus 8%, for a total of 20%. The added 8% reflects
the most common franchise royalty and advertising fee
structure: Six percent (6%) is a "royalty
payment" (an ongoing fee for owning the
franchise), plus two percent (2%) mandatory
advertising fee (paid to franchisor or franchisor's
advertising entity).
The combined
8% is charged on the gross sales of the company-- it
is a variable selling expense.
For
every $100 in sales, the franchise owner must pay
out $8 to the franchisor.
In
Exhibit C, an adjustment in fixed selling expenses is
made: It is assumed that the franchisee will not
budget any other monies to advertising and brochures,
having already allowed 2% of gross sales to go to an
outside advertising fund.
In
Exhibit D, where the 8% franchise charge is not
included in Variable Selling Expenses, a compensating
fixed expense is allowed for advertising and
brochures, in this case $200 per month, or $2400 per
year. A larger operation could budget more, as in the
established operation depicted in the later Exhibits.
Let's
continue to see how general and
administrative overhead come into play
to yield a surprising outcome!  click here
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